Inflation Correction

Remember learning about annoying “context clues” in lit class? Well, it’s time to whip those skills out. Inflation correction might mean different things depending on the context.

If someone is taking a wage or price, and they’re “correcting for inflation,” it probably means they’re taking inflation out of the picture, mafia style. When inflation is taken out of nominal prices (the price on the sticker, or the number on the paycheck), we get what we call the “real” price or wage. It’s “real” because it doesn’t include inflation. Inflation makes prices and wages go up and down, so it can be hard to tell what the actual value of money is.

For instance, if you took a pay cut, but the prices of everything went down around you, there’s a chance you could still buy all of the same things just the same as before. That would mean your “real wage” hasn’t changed, because your buying power hasn’t changed.

Inflation correction might also mean when the government goes back and edits the official inflation numbers. It’s not because they’re actually controlling inflation (rewriting the books, per se), but because they got it wrong. In the US, we use the Consumer Price Index, or CPI, as the main way to measure inflation, but sometimes it’s a little off.

In that case, correcting inflation means the government’s saying “sorry, guys...inflation last month was a little different than we initially thought.”